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The American Way to Natural Gas Vehicles -- and Investor Profits

I'm old enough to remember when you couldn't find diesel anywhere, and now the green-handled pump is everywhere. Natural gas investors would like to see liquefied natural gas, or LNG, and compressed natural gas, also known as CNG, available at every Fuel 'n Fly -- boosting consumption and in-the-basement natural gas prices. In the mid-two dollars, only a few hedged producers are making any money, and those hedges are rolling off. Gulp.

The obstacle to an LNG vehicle-populated U.S. is very "chicken and egg." What Shell or Chevron wants to lay out the clams for an LNG fueling infrastructure without vehicle demand? And what sane vehicle makers would convert to LNG or CNG without the fuel supply?

Who the Heck?Enter water industry guru Richard Heckmann. Heckmann is the jockey investor behind U.S. Filter, a water company he founded in 1990. Acquiring 260 water firms, he grew the company from $17 million in revenue to $5 billion in 1999, selling it then to conglomerate Vivendi for $10 billion.

His new company, Heckmann Corp. (NYSE: HEK) ("Nasdaq: HECK" would have knocked the ball out of the park, but what can you do?), aims to be everything -- water for gas, natural gas liquids, and oil produced through hydraulic fracturing, or "fracking." Fracking a well takes roughly 30 days and a lot of water, but the producing well's life is the real money -- a nice annuity -- for the water servicer at about a 20-to-80 ratio for fracking water to produced water. Heckmann's trucks, pipelines, and permitted disposal wells form a network to and from drilling and production sites. Its business is charging per barrel to provide, remove, treat, and dispose of fresh water and saltwater. And Heckmann knows water regulation inside out.

The company is only beginning to penetrate what it says is a $50 billion a year market for 71.8 billion gallons annually, but that opportunity shrinks if natural gas production fails to make companies a profit. Heckmann needs prices to rise from today's doldrums to maintain and heighten the ceiling.

Business centsHeckmann decided to do his bit and not wait for government subsidies, perhaps through T. Boone Pickens' massive lobbying efforts. Why couldn't the company seed demand through his own company's truck fleet -- the trucks that transport water between Heckmann pipelines and the wells?

He went to industry leaders in the truck, LNG engine, and LNG fueling world. The problem hadn't changed, but the parties came up with a startling solution. Heckmann says: "There aren't any trucks [to fuel]. Or you could go out and buy a fleet of trucks, but where would you get the fuel? There's no place to get the fuel. We sat down with Encana Corp. (NYSE: ECA) , and [if] we have 250 trucks that operate in a 100-mile radius, easy [for Encana] to put three fueling stations at 100 miles, easy to start that circle."

So last April, Heckmann ordered 200 new LNG trucks from the venerable name Peterbilt, a division of PACCAR (Nasdaq: PCAR) , using industry leader Westport Innovations' (Nasdaq: WPRT) technology and the Encana fueling stations. Heckmann says the trucks cost more, but the payback comes in under two years because LNG is 30% cheaper than diesel, and the trucks come with a five-year instead of three-year warranty and sport a 30% longer operating life. Heckmann said in November that the company will have 60 by the end of 2011 and the rest by mid-2012 -- and it's negotiating for more.

At a September 2011 energy conference, Heckmann said: "Somebody had to start it. It is in our interest to see gas prices go up. It is in our interest to see … more gas be drilled and more gas produced, so it ought to be in our interest to figure out how to consume it, and that's what we're doing."

There are those who sit on the sidelines and carp, those who seek food at the government trough, and, as Heckmann says, those who do.

Not the only winnerHeckmann Corp. is not the only company building a critical mass locally to boost gas-fueled vehicle supply and demand, but it's a step beyond the central depot approach, where city busses and corporate fleets refuel at the terminal. And there are first steps for CNG car owners from Honda and the "Phill" home refueling station, but costs are higher, and travel is limited to miles to and from home (though Utah, which regulates natural gas prices to keep them low, became in 2008 the fastest-growing CNG vehicle state with more refueling stations). But to spur growth in businesses throughout the country and in trucks that consume and pollute far more than cars, Heckmann brought together the players needed to get going.

Heckmann, Westport, Peterbilt, and Encana aren't the only ones who may profit. Until natural gas supply and demand come into balance, the top low-cost natural gas producers Ultra Petroleum, Range Resources, and Contango Oil & Gas have the best balance sheets to outlast others and room to cut capital expenditures -- as Ultra just did -- to make them better. Then when prices rise, those three have explosive upside potential.

Growth meets valueHeckmann is the rare company where growth and value investors can shake hands. It's certainly growing and has a large addressable market, even if low prices drive out some producers. And with every mile of pipeline it builds for water transport -- currently between 90 and 111 miles at $1 million a mile -- its replacement value and margin of safety increase. So there's growth for the "growthers" and hard asset protection for the value folks like me.

Heckmann doesn't require an LNG and CNG pump at every Fuel 'n Fly, but it would help. CEO Heckmann isn't waiting. He's creating. And that, my friends, is America.

Tom Jacobs is the advisor of Motley Fool Special Ops, a special situations and opportunistic value service with a small carbon footprint. You can email him and follow him on Twitter @TomJacobsInvest. Tom owns shares of Heckmann Corp. The Motley Fool owns shares of Heckmann Corp.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policythat runs on natural gas.

Comments from our Foolish Readers

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Like the "circle of life", you have described a "circle of business".:)

When I was a kid (and I am pushing 70 now), my father, who as a "truck farmer" put a tremendeous number of miles on his pickup each year, had a big "propane" tank installed in the backyard and a smaller one in the bed of his truck. He used nothing else until he retired and no longer needed to drive so much.

I own HEK, and am somewhat familiar with the other companies, but will have to look closer at those I don't yet own.

Even with lower gas pricing, HEK should do well because of the associated gas that comes with oil production. Oil production will be up as well as associated gas - replacing gas lost from pure gas plays alone...

@jlynch100: I think like "in general trucks use and pollute more" which is true. @Tom Jacobs: very interesting, one thing not altogether clear: How exactly is HEK going to make money on this in a direct way? I only see a rather long and winding road to indirect profits.

I travel the USA & Canada with a RV puulled by a diesel truck. Everywhere, EVERYWHERE, I go there is propane available at almost every (not 7-eleven types) fuel stop. Though located on the properties to fill 5-gal barbeque tanks, those locations could be easily expanded to serve autos and trucks and are already serviced by refill trucks. At recent diesel prices, I'd love to convert. Why create a whole new infrastructure for natural gas?

I drove my Mazda 626 in the Netherlands in the early 80's for years on LPG. The cost of 24 guilder cents per liter versus the 1.30 for gasoline was a no brainer. The tank you had to install in your trunk and some off the hardware set you back about 300 guilders which paid for itself in half a year. The tanks they set up to fuel from are almost identical to some of the propane tanks you see at your local gas station. I could not think of a more appropriate time for this country to get real serious about natural gas than right now. Energy independence, cleaner air, cheaper fuel and we'll put hundreds of thousands of people to work at the same time. You think that this should be an inevitable scenario. When Washington finally gets its act together I anticipate your investments in companies like Westport and Clean Energy Fuels Corp will pay off in a very big way in the not so distant natural gas driving future......

Sending report...

Tom Jacobs is the Lead Advisor and Portfolio Manager for Motley Fool Special Ops, a premium investment service specializing in event-driven value situations such as spinoffs. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio (McGraw-Hill). He doesn't bite, except when teased.